Page 1 of 2 Crisis control fit for the TV age
By Julian Delasantellis
The millionaires in the US Senate, apparently moved by the prospect of having
to actually live on their salary rather than their substantial investments,
passed by a 75-24 vote a sweeter version of the Troubled Asset Relief Program
(TARP) than the one that failed in the US House of Representatives on Monday,
the rejection helping to drive the Dow Jones Industrial Average down 777
points.
The House is scheduled to once again vote on the proposal on Friday; perhaps
enough previously recalcitrant arms have been twisted, bent, fractured and, if
that doesn't work, ripped straight off the shoulders to obtain a passage vote
there, as well.
However, as more details of the rescue plan emerge, and as the world financial
crisis deepens and spreads with each passing hour, serious questions have
emerged as to whether even the
plan's US$810 billion price tag will be enough to stave off the gathering
darkness.
There was never any real doubt that the proposal would pass muster in the
Senate. There's a good reason the upper house of the US Congress is frequently
called the US version of the House of Lords. With members elected statewide for
six-year terms, the sheer expense of running a modern political campaign
replete with enough paid media ads to convince the voters that your opponent is
a serial killer means that the Senate is a very rich boy's and girl's club.
This is especially true in states with several widely dispersed large media
markets - there, the cost of running statewide TV advertisements showing a
person who resembles your opponent drowning squealing puppies in a bathtub can
run into millions of dollars. If you have ambitions of being and staying a US
Senator, you'd better have money, or, like both current Republican presidential
candidate John McCain and 2004 Democratic Party presidential candidate John
Kerry, be willing to marry a lot of it.
If you have money like this, you're probably pretty used to dealing with and
listening to bankers and other financial types, as in the old commercials for
the now long-gone E F Hutton stock brokerage - when the finance business
speaks, the US Senate listens.
Also, the fact that only one-third of the Senate stands for re-election every
two years means the body is less susceptible to the mad manias of know-nothing
populism that regularly infect the House. The Senate is traditionally where
conservative populist wedge-issue initiatives, such as prohibiting gay marriage
or flag burning, go to die. For all the drama of Wednesday's day-long debate on
the Senate floor, the actual result was about as predictable as a professional
wrestling match whose script had been mistakenly published in the fight
program.
The question then becomes, what will happen in the House at the end of the
week? Talk radio is running as white hot as ever in opposition to the bills;
then again, there were reports of several of the 228 representatives who sunk
the proposal on Monday frantically attempting to deny their obvious
responsibility for the stock market massacre that ensued. They were probably
just as frantically trying to change their underwear when they heard that local
TV news stations from their constituency were on their way to their office
seeking a comment.
The representative in charge of making sure that party backbenchers adhere to
the wishes of party leaders is called the whip; in the case of the current
Congress, those positions are held by Democrat James Clyburn of South Carolina,
and Roy Blunt of Missouri. Recently, for the first time, I've been hearing the
word "whip" in a legislative context used as both a verb and a noun.
Also, the bill that emerged out of the Senate is loaded with constituent
goodies pretty much unrelated to the financial crisis. Among these are
adjustments of the Alternative Minimum Tax, more tax credits for "green" energy
initiatives, even a provision requiring health insurers to treat physical and
mental illnesses equally well - I suppose that could be argued as related to
the crisis, since it's driving everybody in the financial world crazy.
Maybe it will pass the House, maybe not. Observers have noted that the
legislators facing tough re-election fights next month overwhelmingly voted
against the proposal on Monday; that can't be a good sign, with public opinion
still so in opposition. A second failure in the House would undoubtedly kill
the measure until at least after the elections on November 4; the party leaders
are not going to keep on stretching their necks out on this until they get them
cut off.
That would essentially halt all but the most token government actions to deal
with events; initiatives that require a government expenditure need a positive
congressional vote. The markets would then be essentially on their own. In that
case, it won't be walking under a ladder that will be unlucky; walking past a
Wall Street skyscraper will be far more perilous. A 100 kg investment banker
falling 50 stories will raise a heck of a bruise.
But as Congress tunes up Nero's lyre while the financial system burns, other
events are happening, none of them seemingly making any of these problems any
easier.
Earlier this week (see
The cost of 'no' government, Asia Times Online, October 1 , 2008), I
noted how some on the right side of the political spectrum were then claiming
that the entire deleveraging monster could be slain without the expenditure of
a single taxpayer dollar, through the suspension of a bank accounting procedure
called mark to market. This would allow banks to deal with the crisis posed by
the depreciating mortgage-backed securities in its portfolio by, in essence,
just pretending they were worth billions more than they actually are.
Accounting and investor groups hate this idea; how can you know what a bank is
worth if its balance sheet is full of lies? You might think that the
conservatives in the George W Bush administration, ideologues who constantly
stress the primacy of unchangeable and eternal standards of morality and truth,
would also be opposed to such shameless situational accounting.
But in the current crisis sic transit morality!
On Tuesday, the Securities and Exchange Commission had to choose between the
markets and truth and morality, and it was truth and morality that got thrown
into the big green recycling bin in the copy room. In a press release that
seemed to have been released so fast that it probably could have sliced off
some poor scribe's fingers as it flew out of the fax machine, it announced
that:
When an active market for a security does not exist, the use of
management estimates that incorporate current market participant expectations
of future cash flows, and include appropriate risk premiums, is acceptable.
The vast majority of the derivative securities whelped as bastard children out
of the mortgage backed securities (MBS) are not traded actively; they were
never meant to be. When they do trade, they currently change hands at such
ridiculously low prices relative to face value, sometimes at around 20 cents to
par, that you sure can see why the bankers would rather opt for fantasy prices
in preference to real ones.
Wringing the neck of confidence
The problem here is that, in a financial crisis that has at its heart a loss of
confidence in the financial system, why would you want to even further drain
confidence by putting in question the actual truthfulness of bank balance
sheets? Michael Rapoport of Dow Jones Newswires makes an intriguing point:
Wachovia Bank, just bought out by Citicorp for $2 billion, had on its last day
on its ledgers assets with a book value of $75 billion. Maybe its not that
asset values are too low - maybe the entire crisis is the markets telling us
that they're too high.
A skilled Lothario might whisper to an intended conquest that he'll respect her
in the morning. With the ever-quickening demise of mark to market accounting,
America's banks and other financial institutions engage in no such charade -
they're basically out and out bellowing to investors now that they're going to
be lied to, then roughly copulated with, and that there's nothing that they can
do about it - except to keep selling.
But among all the din and caw of yet another pointless political debate, with
the bailout proponents claiming that without it the lights at high school
football games will go dark, and the bill's opponents making the very helpful
observation that "In my district ol' Doc Hanson ran his swine gelding business
for 69 years without a government handout, Wall Street can do the same", an
important point is, as usual, being overlooked. If the question is whether or
not to buy something, like the $700 billion in mortgage securities to be bought
in the plan, shouldn't the question of how much you're going to pay for it be a
major consideration?
All children in the capitalist world quickly learn the tradeoff between price
and quantity. Get some money from the grandparents for your birthday, and when
you get to the toy store you can spend it on a lot of cheap things, like
marbles, or, if you're lucky, maybe a single video game or bicycle.
It's the same thing with mortgage-backed securities. The $700 billion can be
spent to buy lots and lots of them very cheaply, or much fewer of them priced
higher. Whichever option is chosen will critically determine whether we'll soon
be able to see the breaking of the dawn out of the current darkness.
Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke have
been playing this issue pretty close to the vest, but through leaks and the
likes it looks like they're going to be buying high, paying as close to par
value on the securities as feasible. If this really is the implementation
strategy for the buyout, one wonders just how much Dr Bernanke and Secretary
Paulson really understand what's on.
What's the current problem with the world financial system? Well, it's just
about the same as it always is - money. There's not enough of it. In financial
lingo, the system, namely, the banks and other financial institutions that are
its component parts, need to be "recapitalized"; they need to get back what the
deleveraging beast is currently destroying.
Will paying higher prices for MBS accomplish that? It will, at least
temporarily for whoever is lucky enough to get a piece of the government
action. But for the system as a whole, the benefits are a lot more
questionable.
It is estimated that there are about $5 trillion of original securities created
out of US mortgages - $700 billion gets you 14% of those, about what is to be
expected to be the high-water mark for US homeowners defaulting and being
foreclosed in the near future.
So $700 billion in bad loans, $700 billion bailout. Perfect, right? Not a
chance.
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